The final push: Public construction leads the way, but Economic Development & Commerce Secretary Milton Segarra has a bag full of economic development tricks he hopes will produce quick magic

The vast majority of people in Puerto Rico give the Calderon administration a failing grade for its handling of the economy, with 83% of those responding to a recent poll rating the results of this administrations economic development programs "bad" or "terrible" (CB July 10).

Unfazed by the criticism, Economic Development & Commerce (EDC) Secretary Milton Segarra, who has been the administrations economic czar for barely six months, is setting out to change that perception. He will have to work magic.

"Several initiatives have been discussed to generate economic activity in Puerto Rico during the next 16 to 18 months," said Segarra. "Out of several group discussions held with representatives of the private and academic sectors, we identified short-term strategies that could be immediately implemented to start up the islands economy, which is what is needed most."

In his bag of tricks Segarra has not only the administrations commitment to deliver on its promised $7.9 billion, four-year investment in infrastructure, but a whole set of new or revamped initiatives that include a breakthrough in government permitting red tape, a reduction in the cost of doing business, a boost to local exports, and a focus on high-tech industrial development.

Speeding up infrastructure investment

"We have completed more than $3.1 billion of the total $7.9 billion in infrastructure investment we had projected for the four-year term," Segarra said during an interview with CARIBBEAN BUSINESS.

He appeared confident that the administration would reach its goal, which will require it to spend an additional $4.8 billion in public works in the next 18 months. "We plan to push this public infrastructure program more aggressively during the next 18 months," said Segarra.

While it is true such a massive amount of government investment in public infrastructure projects would result in an immediate boost to our economy, it must be noted that this isnt the first time the Calderon administrations top economic development officials have said as much to CARIBBEAN BUSINESS. Segarras predecessor, Ramon Cantero Frau, and Department of Transportation & Public Works Secretary, then Highway Authority executive director, Fernando Fagundo made similar promises during exclusive front-page story interviews through 2001 and 2002 (CB Sept. 27, 2001; March 7, 2002; May 30, 2002). Further CARIBBEAN BUSINESS reporting on the status of the projects revealed the announced investments hadnt panned out or were moving at a snails pace (CB January 2003).

With an election year just around the corner, that may all change. Between now and December, Segarra said, some 90 new public infrastructure projects worth $1.2 billion are slated to begin construction. Another 200 projects, each worth less than $5 million, will add some $200 million to the total. The Infrastructure & Strategic Projects Office at La Fortaleza confirmed the information.

Some 153 projects worth $726 million are currently under construction and will be completed by December of this year.

"By December 2003, we will have completed some $5.2 billion in public infrastructure projects out of the $7.9 billion budgeted for the four-year period. We will be completing another 20 projects worth $109 million during the first quarter of 2004," said Segarra.

Segarra said public infrastructure investment has helped to sustain the islands economy during the past two years. He noted that from 2002 to 2003, there was a 5.5% gain in public-sector construction investment, as well as an increase in the sale of cement and in the number of construction-industry-related jobs, considered indicators of the industrys health.

"Much of that [investment] is becoming a reality. You can see how it is moving from paper to bids, and then to projects under construction," said Segarra. "You see small to big projects, from curbsides and sidewalks to bridges, roads, schools, and power substations."

Segarra said the development poles are to thank for the spread of public infrastructure investment all over Puerto Rico, including that in the urban centers. Gov. Calderon introduced the concept of development poles as a way to disseminate the benefits of the central governments economic development projects throughout the island.

As for private-sector construction investment in the pipeline, Segarra estimated it at $3 billion to $4 billion, although he didnt have a breakdown available at press time.

Speeding up the permitting process

An important element of the Calderon administrations new five-pronged strategy to spur economic development during the next 18 months involves speeding up the permitting process.

Segarra said that although the Calderon administration has made great strides in the permitting area in the past two-and-a-half yearsincluding establishing Express Processing Centers, revising more than 40 regulations, and creating the Governors Construction & Environmental Advisory Councilsit will adopt additional measures to simplify and accelerate the process even more.

"By all means, I want to keep the islands permitting process from becoming an obstacle to economic development," Segarra told CARIBBEAN BUSINESS. "We want to transform the process into one that guarantees that the islands economic development is organized and planned and in compliance with all our bylaws."

The first measure entails increasing the number of permits that can be issued through certification. This applies to cutting and pruning trees, performing hydrologic and hydraulic studies, and renewing a soil-removal permit. Segarra said these three permits usually take at least 60 days to process, but now will be issued in just five days.

"A permit through certification is when a licensed professional in a particular field [an engineer or surveyor, for example] certifies that a permit is complete and meets all requirements, bylaws, and regulations," explained Segarra. "The certification will be based on the professionals criteria, and his or her license will be at stake if it isnt done correctly."

The government is also speeding up the permitting process by consolidating some of the permits at the Environmental Quality Board. This applies to permits for fugitive dust, solid-waste generation, and plan control.

"Each of these permits had to be submitted, evaluated, and discussed at public hearings separately, which meant applying for all three involved nine steps. What we have done is consolidate the three permits into one, reducing the steps from nine to three," said Segarra.

He added that the two initiativesincreasing the number of permits granted through certification and consolidating the three environmental permits into oneare being implemented at the Planning and Environmental Quality boards, respectively, and will go into effect by Sept. 30.

The government is also boosting the number of projects approved through categorical exclusions, said Segarra. Those projects meeting certain requirements wont have to go through the lengthy permitting process.

"This is basically a decision to be made by the Environmental Quality Board. Chairman Esteban Mujica will publish on Aug. 1 the complete list of categorical exclusions, so we can move ahead those projects that dont really need to go through the entire permitting process," said Segarra. "This will definitely have a positive impact."

The deadline for implementing the categorical exclusions is Sept. 30, said Segarra.

Project management office

To push through major projects stuck in the permitting process, Segarra has set up a Project Management Office right in his own department. Managed by Omar Contreras, the office began operations July 1.

The office will only accept cases referred by one of the governments promoting agencies, such as the Puerto Rico Industrial Development Co. (Pridco), Puerto Rico Tourism Co., the Department of Housing, the Department of Agriculture, the Commerce Development Administration, and the Planning Board, explained Segarra.

"We have identified experts in the permitting process whose job will be to find out whats delaying projects and find a solution so that these can move along in the process," said Segarra.

Segarra acknowledged that in order to reduce business costs in Puerto Rico, the governments executive, administrative, and legislative efforts must act in concert.

"The purpose of this administration is to continue strengthening the islands economy. To do so we have adopted a public policy not to sponsor or endorse legislative or administrative initiatives that have the effect of increasing the cost of doing business in Puerto Rico, unless they increase productivity," said an emphatic Segarra.

"This is a matter of competitiveness. I believe Puerto Rico has a solid profile as a defender of employee rights, jobs, and employee benefits, and we must preserve this," he Segarra. "However, we cant [tolerate] increased costs that will eliminate our competitiveness. We are prepared to present, defend, and move ahead with this public policy because any initiative that doesnt include an element of productivity hinders the islands economic development."

Segarras words will be put to the test Aug. 1, when the Senate takes up discussion of Senate President Antonio Fas Alzamoras proposal to mandate that all stores close on July 25 (Commonwealth Constitution Day). This bill could end up costing local businesses approximately $6 million, according to legislative sources. As of press time on Monday, with Segarra on vacation, EDC Deputy Secretary Sergio Marxuachs only comment on Fas Alzamoras bill was, "This administration has adopted as its public policy not to endorse legislative or administrative initiatives that increase the cost of doing business in Puerto Rico, unless they also increase productivity. We continue to stand by this position as part of the plan to reduce these costs."

When asked about whether the administration has any more new taxes up its sleeve, Segarra responded that Gov. Sila Calderon had said no new taxes would be imposed. As to the Legislature, which has passed laws that have increased costs to businesses, Segarra said, "Measures that have productivity at their core will have our support. If the measures dont increase productivity, we will stand firm and make suggestions so that it is included."

Segarra added that the administration remains committed to tackling the issue of the high cost of energy in Puerto Rico.

Since 2001, the Puerto Rico Electric Power Authority (Prepa) has been hedging, or buying insurance to counter rises in the price of petroleum and avoid raising energy costs to consumers. In 2002, a year after making the offer, Prepa began giving an 11% discount on the electricity rates of companies establishing or expanding operations on the island.

"Every group with which weve had a discussion has brought up the cost of energy," said Segarra. "Prepas board recently approved an 8% discount over two years on the energy bills of manufacturing companies that didnt qualify for the 11% discount. This credit is possible thanks to the money reimbursed from [petroleum hedging programs] and another $4.7 million that increases the reserve for this program. The discount will be available until March 2005."

The EDC and Prepa are also looking at alternatives for energy production, albeit for long-term implementation. Among the possibilities are joint investments with power plants, finding other uses for power lines, and creating a board that evaluates initiatives to lower energy costs. Segarra denied that privatizing Prepa is being considered.

Small and midsize business, however, will have to wait for any sort of energy discount. "About 42% of the islands gross national product [GNP] comes from large manufacturing companies with a work force of 135,000," said Segarra. "This doesnt mean small and midsize businesses dont create jobs. But at this time, manufacturing makes a larger contribution to Prepas coffers, and the agency needs the revenue to issue bonds and continue capital improvement projects."

Attracting & expanding high-tech

As previously reported (CB July 3), Pridco is undergoing a reorganization that includes reclassifying and training promoters, who will be known as project managers. In addition, a team of consultants from Puerto Ricos Estudios Tecnicos and Floridas Grubb & Ellis will re-evaluate Pridcos public policy, practices, and strategies.

"We need to re-evaluate Pridcos use of incentives, which are based on the number of jobs created, location, and infrastructure investment, to see if they are appropriate for todays economy," said Segarra, who is also head of Pridco since Hector Jimenez Juarbes resignation in July. "In Brazil, high-technology companies get a 5% tax deduction as long as it is reinvested in research & development [R&D]. Puerto Rico also has to determine which sectors to pursue, such as R&D, which takes longer to develop, or biomanufacturing, where we can be successful more quickly."

Pridco is committed to hiring U.S. and international real-estate brokers and site selectorsprivate agencies that are contacted by large corporations planning major projectsto market Puerto Rico. Segarra said Pridco will also work with local business organizations such as the Puerto Rico Manufacturers Association and the Puerto Rico Chamber of Commerce to promote the island and help them make presentations to commercial prospects. Special promoters are already working on the Puerto Rico Convention Center (Colliers International) and the Port of the Americas (CB Richard Ellis).

To provide for more and improved services, Pridco recently made a presentation to Moodys and Standard & Poors on issuing $165 million in bonds. Close to $70 million would be used to repay a credit line Pridco has with the Puerto Rico Government Development Bank. The remainder would be invested in capital works, such as industrial parks and other Pridco buildings. Pridco is one of the governments largest property owners, with 25 million square feet of land and property that averages 89% annual occupancy.

Pridco is continuing to rehabilitate, remodel, and construct industrial parks throughout Puerto Rico. In February, it began a $4.5 million project to remodel Guanajibo Industrial Park in Mayaguez, which should be finished by the end of 2004. This park will be turned into an R&D facility to meet the demands of high-tech companies.

Construction of two more industrial parks should begin this year. Hewlett-Packard will be the main anchor of a $20 million industrial park in Aguadilla. Construction of the park in Dorado is to begin in January 2004, while construction of another $3.5 million facility in that municipality should be completed by May 2004.

In addition, Segarra is preparing a bill to amend the governments Venture Capital Law. "Businesses need more access to venture capital," he said. "There is a need for a venture capital network to transform science and technology into a marketable product in the pharmaceutical and biotechnology areas. Amending the Venture Capital Law would encourage partnerships between local investors and pharmaceutical companies."

Segarra also discussed amending the governments incentives program to grant tax credits as goals are reached each year, not all at once when a company begins operations. This would allow the government to stretch its dollars.

Segarra has also created an institutional promotion board with representatives from the various agencies under the EDC. Temporarily managed by former EDC Communications Director Dina Albanese, who now handles the Rums of Puerto Rico division, Primage (as the program is known) will administrate the $60 million to $70 million that is allocated to promote Puerto Rico outside the island.

"We want to establish a communications strategy that is a model not only for this administration but for others to come," said Segarra. "Our most significant contribution would be to design a process that is consistent."

Pridco recently added to its website (www.pridco.gobierno.pr) information about the benefits of operating within a U.S. jurisdiction as a foreign corporation, including tax and business incentives and operational advantages. Visitors can also create a customized brochure of Pridco services, statistics, and industry groups.

"Sustained economic development requires a vision on which to establish planning parameters over the long term," said Segarra. "The citizens committee that was integrated into the program recommended A.T. Kearney be hired as the lead consultant in a process of formulation and analysis of information, formulation of a vision, and implementation of that vision." That process should be conducted over the next 11 months.

Government boosts support to local businesses

By JOSE L. CARMONA & MARIALBA MARTINEZ

Economic Development & Commerce Secretary Milton Segarra said the Calderon administration would implement several new initiatives in the next few months to further assist the private sector . These include creating a Cybernetic Center, establishing the Commerce & Export Co. of Puerto Rico, enacting legislation that promotes the resale and export of locally made products, and providing a special marketing incentive to exempt manufacturing companies on the island.

Cybernetic Center

To be built in Guaynabo with a $600,000 investment, Puerto Ricos first Cybernetic Center will house four or five information technology companies that will serve small and midsize businesses.

The purpose of the Cybernetic Center is twofold: to help local tech companies create jobs and small and midsize start-up companies reduce overhead costs by providing them with website design and hosting services.

The theory behind the Cybernetic Center, explained Segarra, is that giving small businesses an Internet presence will enable them to increase their exposure, marketing, and sales by exporting local products.

"In addition to creating Web pages, the Cybernetic Center will help small businesses forge alliances with the main carriers [UPS, FedEx] so they might export our products worldwide," said Segarra. "A web page, which usually costs between $2,000 and $6,000, will be free to the businesses served by the Cybernetic Center."

The Cybernetic Center will create some 100 direct jobs initially, and several more indirect jobs are expected as the participating start-ups prosper.

The Commerce Development Administration (CDA) and Promoexport will be in charge of the Cybernetic Center, which is expected to begin operations in the first quarter of 2004. "We hope to duplicate the Cybernetic Center throughout the island. We want to open centers in Mayaguez, Ponce, Utuado, Fajardo, Carolina, and other municipalities," said Segarra.

Commerce & Export Co. of Puerto Rico

This new public corporation, product of the merger between the Commerce Development Administration and Promoexport, intends to improve the coordination of government services and support to entrepreneurs and business owners in Puerto Rico.

"The services these agencies provide no longer meet todays challenges, especially in light of the upcoming Free Trade Area of the Americas and the increasing demand local products have experienced. By merging the two agencies, we can improve our services and maximize our resources," said Segarra.

Legislation will be required to create the new public corporation, which will probably be considered during the next legislative session. There will be a six-month transition period once the legislation becomes effective while the new corporation gets up and running.

Segarra noted the merger doesnt increase operational costs or reduce the number of employees at the two agencies. The new public corporation will have its own board of directors, led by Antonio Sosa Pascual, CDA administrator & Promoexport executive director.

The new corporation will aggressively promote laws and incentives related to the islands economic development, specifically those aimed at increasing the resale and export of locally made products, such as Law 169. Law 169 grants a 10% tax deduction to U.S. mainland and foreign companies that purchase local goods for distribution outside Puerto Rico.

"We have 27 measures that have to do with economic development, manufacturing, commerce, tourism, etc., but we have to make sure more people participate and use them," said Segarra. "The more people know about them, the more they will use them."

Of the 27 economic development laws approved by the Calderon administration in the past two-and-a-half years, Law 169 has received the most attention because it has been applied to megaretailers such as Wal-Mart. According to an EDC report, four local companies have benefited from Law 169: Pan American Grain, Lanco, Campofresco, and Industrias Vassallo, which supply products to Wal-Mart. The law has generated an economic impact of $16.9 million invested in infrastructure, machinery, and equipment and 169 new jobs created.

"These are the things we need to stimulate and promote," said Segarra.

Another EDC strategy goes into effect on Aug. 1, when the operating hours at the Port of Puerto Nuevo in San Juan and Muñiz Base in Carolina will be extended.

"These are Puerto Ricos principal entrances for merchandise, and the cargo process shouldnt be detained," said Segarra. "Transportation and logistics companies can avail themselves of the extended schedule to move their cargo more quickly. And all it took was an administrative order from the Treasury Department [Hacienda]."

In addition to the regular hours, the Port of Puerto Nuevo will operate Saturdays and holidays from 7:00 a.m. to 5:00 p.m. The tax collection agency (colecturia) at Muñiz Base will be open Monday through Friday from 7:00 a.m. to 5:00 p.m. and Saturdays from 9:00 a.m. to 2:00 p.m.

Maritime carriers will presumably reschedule their vessels arrivals and departures to take advantage of the extended hours. According to Segarra, U.S. Customs & Border Protection will also be open then.

The EDC is also working with Hacienda to increase the participation of businesses related to the cargo transportation industry in the Electronic Tax, Payment & Release (IPLE by its Spanish acronym) program. Most airline transportation companies already use the Hacienda-administered system, but maritime and ground transportation businesses need to be encouraged.

Special marketing incentives for local manufacturing companies

Most of the business incentives provided by the government have been in the form of tax credits and subsidies, such as discounts on large corporations electricity bills, said Segarra. There has been no mechanism for helping local companies market their products.

"We have created a fund so that local exempt manufacturing companies can get money through Pridco to market and promote their products," said Segarra. The fund will cover up to 50% of participating companies marketing costs.

"If these companies have better sales, their bottom line will improve and more jobs will be created. The money comes from Pridcos own budget," said Segarra.

The fund was slated to start with only $200,000, but Segarra raised it to $1 million. He admitted the sum isnt a whole lot, but said its a good start. The only requirement of participating companies is that they not reduce their work force. If they eliminate jobs, they will have to return the funds.

The Calderon administration had envisioned adding 4,000 hotel rooms throughout the island to reach a total inventory of 16,000 by 2004.

Milton Segarra, secretary of the Department of Economic Development & Commerce, said approximately 24 new hotel projects (mostly small to midsize properties) have been completed, representing an investment of $247 million, 1,526 new rooms, and 1,456 new jobs. Some of these new hotels have been in the Tourism Co.s pipeline for several years or are expansions to existing properties.

The government expects 14 hotels to begin operations in 2003, representing an investment of $371.5 million and 1,554 new jobs, while another six projects should begin construction, Segarra said. These projects, when completed, would bring the administration close to meeting its original goal of adding 4,000 rooms in four years.

Segarra, who was executive director of the Puerto Rico Tourism Co., also said Rafael Hernandez Airport in Aguadilla (at the former Ramey Air Force Base) and Fernando Luis Rivas Dominicci Airport in Isla Grande are two of the islands greatest tourism assets.

"Rafael Hernandez Airport is an invaluable resource which all government administrations have made some effort to develop," Segarra said. "It is one of the governments most important strategic assets in developing the economy of Puerto Rico. It complements the Port of the Americas and the manufacturing industry as an aerial transshipment & cargo port."

A committee with representatives from the public and private sectors was created in January to determine the best use of 800 acres at Rafael Hernandez Airport, 500 of which could be developed for value-added activities or as an industrial park.

"This month [July], we started the process of selecting a private operator to develop the airport, mainly for cargo, logistics, and distribution activities," Segarra said.

Earlier this year, Gov. Sila Calderon decided to relocate Fernando Luis Rivas Dominicci Airport. "The airport is too close to the site of the Puerto Rico Convention Center," she said. "We can relocate the airport to an area that is more appropriate."

The alternative site has yet to be determined, but Calderon has promised it will be centrally located. The possibilities include Humacao, Fajardo, and Arecibo. Other options include moving the airports operations to a new airport in the vicinity of San Juan or incorporating its fixed-wing air taxi and charter operations into Luis Muñoz Marin International Airport.

The move, however, cant be done as quickly as the Calderon administration had anticipated. The airport must be decertified before the government can shut it down.

"To decertify a Federal Aviation Administration airport takes at least four years. Its not as if you can go there and put a padlock on the gate," Segarra said. "The airport could be developed into something more spacious, but obviously there are operations generating an economic impact that must be transferred in a responsible manner."